advocate for the following policies:
1) cut the provincial corporate tax rate from 10% to 3% and income tax rate from 10% to 5%, making up the difference in revenue loss with a VAT that excludes all capital inputs. ...
2) adopt an innovation agenda that draws on endogenous growth theory
3) adopt a hedging program for natural resource related revenues
I haven't yet said much of anything about (2) yet, never mind (3). (1) and (2) both address the issue of economic growth, with (1) being concerned with incentives to add to the capital stock. If I own a warehouse but don't own any forklifts, if I go out and buy one that's investment since it adds to the physical stock of plant and equipment. But higher levels of investment are the not the only way to stimulate economic growth, and moreover they can only get one so far.
Stanford economist Paul Romer is generally considered to be one of the most prominent and pioneering contributors to endogenous growth theory. Rather than get overly involved in what "endogenous growth" means, I'll just emphasize the idea that with respect to trying to realize growth by only adding to the capital stock, there is a problem of diminishing returns. Professor Romer gives a 77 minute podcast here on his new growth theory, but I'd note one excerpt in particular where Romer explains this diminishing returns problem:
Think of an activity like moving goods around in a distribution center. Goods come in from manufacturers, and then the distribution center gets them on different trucks and sends them out to stores. You could run a distribution center with 100 workers and just one forklift, and the first forklift would be really valuable for moving the heavy things.
Then you could add a second forklift and that would still add real value. You'd get a lot more done in that distribution center. But by the time you've added the 30th or the 40th or the 50th forklift, each additional forklift is really not helping you very much. So with fixed recipes for how you arrange things while you're adding more and more physical capital, you do run into diminishing returns.
Economies which try to grow by just adding more and more forklifts eventually do run into serious trouble. The Soviet Union tried to grow like that for a while with essentially no innovation but very heavy investment in physical capital. And they grew for a bit because they started out short on capital, but they rapidly ran into diminishing returns from accumulating capital.
So you have to keep discovering ideas.
Ideas are the critical ingredient here. The ideas of interest here are innovations that allow businesses to produce more output per unit of input.
The upshot of Romer's work is an enormous emphasis on education in general and innovation in particular. The Alberta Research Council, the U of A's Technology Commercialization Centre, TEC Edmonton, the Ingenuity Fund, UTI, and Calgary Technologies would all be generously funded if I were in control of the purse strings, and just not because I worked for ARC in the past and "specialization in technology commercialization" is printed on my U of A MBA parchment. It is sound economics, as there are huge positive externalities here.
But there is more that government can do than just provide funding and tax incentives. Governments can facilitate the creation of innovation "clusters." One of Romer's many interesting proposals is for Canada to create a "charter city" in Cuba. Bilateral US-Cuban relations being what they are, the US and Cuba could agree to a third party's proposal to administer Guantanamo Bay, with the idea being that the third party could do for Cuba what Britain did for China by administering Hong Kong. After Alberta gets its own policies reformed such that they are truly investment, business, and trade-friendly, the province could cooperate with Ottawa to negotiate the acquisition of rights from the US and make the territory subject to Alberta tax and regulatory policy. A half-baked idea? Maybe. But it might also be a great opportunity for both Alberta and Cuba to advance economically, with the pace determined in part by what Cuba is comfortable with.
Alberta's ministry of Advanced Education and Technology is already well-placed to a do a lot of good things, it just doesn't have the attention it needs relative to competing ministries and there is an inclination on this government's part to set the stage for "picking winners" instead of focusing on the macro policy environment. "Theme 1" of "Alberta's Action Plan", for example, is "Enhancing an already strong tax environment." It is not, in fact, already strong, as tax policy experts have noted. Reference is made to the federal Scientific Research & Experimental Development credits that Alberta also offers, but as the CD Howe Institute observed in 2006,
the federal and provincial governments preoccupation with tax credits targeted at research and development, and relative inattention to the competitiveness of the overall tax regime, is misguided. In effect, the Canadian approach has been to give with one hand, by providing generous tax credits targeted at R&D, and to take with the other, by imposing high taxes on the fruits of innovative activity and entrepreneurship.
The 1998 Technical Committee on Business Taxation even recommended that SR&ED credits be reduced, in conjunction with other reforms.
An innovation agenda that acknowledges the work of people like Paul Romer, who is widely expected to eventually be awarded the Nobel in economics for his ideas about growth, is both supplementary and complementary to investment friendly tax reform.
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